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Affinity Insurance Ltd. is a member-owned heterogeneous group captive domiciled in the Cayman Islands. Each Shareholder has equal ownership and invests a one-time cash capitalization of $36,000. This is broken-out into two categories, $35,900 of redeemable preference shares and $100 for a single common share. Each Shareholder represents a single and equal vote on Affinity’s Board of Directors regardless of premium size.

Affinity operates on a five year accounting cycle for commuting a specific underwriting year. The Board of Directors endeavors to declare an initial dividend distribution for a single underwriting year, three years after the close of the policy period. Each underwriting year stands on its own.

Affinity’s premium is developed through the use of an actuarially determined loss forecast. The actuary will use five years of loss history for all lines of coverage, generally, this includes Workers’ Compensation, General Liability, Auto Liability, and Auto Physical Damage. The loss funding, derived from the actuarial forecast, is broken-out into two categories by the actuary known as the “A & B” Funds. The “A” Fund pays for the first $150,000 of any loss and the “B” Fund contributes to the remainder of the company’s loss layer up to $500,000 total per occurrence. In addition, the concept of risk sharing and risk shifting is important to Affinity for deductibility purposes. Affinity is designed by its members to have an acceptable level of risk sharing. A complete copy of the premium formula is available in the offering memorandum.

Simply put, expected losses are funded by the member and remain in that member’s individual equity account, within Affinity, until losses are paid. Each member receives investment income on its equity balance until that specific underwriting year is closed. At that time the “tail” liability is sold and the remaining equity balances, including investment income, are disbursed in correlation to the final performance of each member.

Purchasing both specific and aggregate excess insurance protects Affinity and its members. Specific excess reinsurance protects the captive against a single catastrophic loss. The aggregate excess protects the captive against a high number of frequency losses that fall within Affinity’s retained limit. Combined, these coverages provide Affinity members with the comfort of a loss “cap” at a predetermined level for each policy year. The “maximum” premium in Affinity is two times the “A” Fund plus the “B” Fund plus operating costs. The concept is based upon controlling the predictable losses and reinsuring away the unpredictable losses.

As was mentioned, each Affinity member has a potential maximum of one additional “A” Fund. As a result, each member must provide a letter of credit or cash security equal to 2/3rds of its “A” Fund. An additional 2/3rds of “A” will be posted for each additional underwriting year up to a maximum of 200% of the average “A” Fund for the most recent three year period. This provides member-to-member security, capitalization for Affinity, and supports a single back-to-back letter of credit to the policy-issuing carrier (Zurich North America) who is the ultimate financial guarantor for Affinity.